Three Scenarios for the Future of the WTO Appellate Body, or: Why WTO Members Should Start Negotiating a DSU 2.0

A fundamental uncertainty bedevils attempts to unblock the appointment process of WTO Appellate Members: is the US holding up Appellate Body appointments in order to generate enough leverage for a negotiated reform of WTO dispute settlement? Or does the US seek to abolish the Appellate Body (in effect if not in law) in order to return to a GATT-style dispute settlement system where WTO Members can effectively veto panel reports – a result that it will achieve by default without any need for negotiations? This uncertainty matters: As long as WTO Members hold out hope that the US will start to engage at some point, they have an excuse not to start negotiating reforms to the DSU among themselves; after all, they’re waiting for the US to make a move. In my view, this is a risky strategy. It might play out in one of two ways:

Scenario 1: WTO Members get lucky and everything works out (unlikely)

Given Lighthizer’s nostalgia for the GATT’s dispute settlement system, it strikes me as unlikely that he will engage in negotiations to preserve binding dispute settlement in the WTO. However, Trump might lose the 2020 presidential election, and his Democratic successor might install a USTR who has more appreciation for the value of the WTO dispute settlement system. While a new USTR would probably not simply unblock the AB appointment process, given the bipartisan concerns about the operation of the AB in the US, she or he might be willing to use the US’ leverage to negotiate reforms that will lead to an improved system. In the best-case scenario, a reformed AB could take over relatively seamlessly: as Geraldo Vidigal has recently noted, the current AB will likely be issuing reports until way into 2021. However, this outcome faces long odds: from the outcome of the 2020 election to the new USTR to WTO Members reaching consensus on amendments to the DSU, everything would have to fall into place.

Scenario 2: WTO Members wait, and wait, and the AB goes away (likely)

A second possibility is that, the longer WTO Members wait – and if Trump gets re-elected or his successor installs a USTR who maintains the blockage, they could find themselves waiting for a very long time – the more they will resign themselves to losing the AB and with it the binding nature of WTO dispute settlement (at least in its current form, as binding WTO dispute settlement could exist with a panel process alone and no appeal). WTO Members might adopt ad-hoc fixes, such as no-appeal agreements, to mitigate the impact. And, as Rob McDougall has pointed out, losing binding dispute settlement “will not bring about the collapse of the rules-based trading system”. However, this scenario has considerable downsides: it would create legal uncertainty, as the system would no longer have a mechanism to create consistency between conflicting panel reports, and WTO Members will likely resort to unilateral retaliation if there is no prospect of obtaining authorization to retaliate from the DSB (incidentally, this prospect might incentivize losing parties not to block the adoption of panel reports: they may well prefer that the complainant is subject to the strictures of the DSU Art. 21 and 22 procedures in implementing retaliation than that it does so unilaterally.)

Alternatives to waiting

What options do WTO Members have if they do not want to take their chances and put the survival of binding WTO dispute settlement into the hands of the US? Voting to launch the appointment process is not an option, since all decisions under the DSU have to be taken by consensus (DSU Art. 2.4). Amending the DSU without US cooperation is not an option either, since that must be done by consensus as well (WTO Agreement Art. X.8). Establishing a temporary appeal substitute under Art. 25 is possible, but may not be worth the effort, as Rob McDougall has convincingly argued. The only viable option, in my view, is for WTO Members to negotiate a DSU 2.0 and add it to Annex 2 of the WTO Agreement by amendment.

Scenario 3: WTO Members Negotiate a DSU 2.0

What would a DSU 2.0 look like?

A DSU 2.0 could incorporate the bulk of the provisions of the current DSU by reference, but should also include fixes to Art. 17 that would address those US concerns that are shared by other Members, while removing the ability of a single WTO Member to block Appellate Body appointments. The DSU 2.0 would provide that disputes between WTO Members who have accepted the DSU 2.0 will be resolved pursuant to the new agreement. Disputes involving a WTO Member who has not accepted the DSU 2.0 would continue to be resolved (to the extent possible) under the old DSU.

There are two major reasons for negotiating a DSU 2.0:

Starting negotiations on a DSU 2.0 would change the negotiating dynamic

Adding a DSU 2.0 to the WTO Agreement will require an amendment. However, since it would be an amendment to the WTO Agreement (rather than an amendment to the DSU), it could be adopted by a two-thirds majority. This would fundamentally change the negotiating dynamic. To begin with, WTO Members would no longer have the pretext of having to wait for the US to start negotiations. And since the US (or any other WTO Member for that matter) could no longer rely on their ability to block the outcome (as they could if the negotiators were trying to amend to the original DSU), this would create a strong incentive to engage. The US might not even be opposed to the negotiation of a DSU 2.0: either the result is to its liking, in which case it (under a new Administration) might sign up, or it would be able to free-ride on the signatories being subject to binding dispute settlement in their disputes among each other.

A DSU 2.0 could pave the way to pluralism in WTO dispute settlement

Even if the US does not join the DSU 2.0 and the DSU 2.0 thus ends up becoming a parallel dispute settlement system, this would be better than the alternative of losing binding dispute settlement entirely, since those WTO Members who still want to have binding dispute settlement could continue to use it. Having two parallel dispute settlement systems in the WTO would simply be a recognition of the fact that there are genuine philosophical differences among WTO Members about the appropriate role of adjudicatory bodies in international trade law (Rob McDougall’s CIGI paper does a fantastic job at teasing out these differences). Instead of attempting to shoehorn these different conceptions of the judicial role into one system, a DSU 2.0 would signal an embrace of pluralism in WTO dispute settlement.

Is a DSU 2.0 realistic?

Implementing changes to the WTO dispute settlement system via a new (but largely identical) DSU rather than amendments to the old DSU may sound far-fetched, but it is actually a tried-and-tested method for implementing new rules in the absence of consensus. In the late 1980s, when the US was thinking about how to make the GATS and TRIPS part of the GATT, it used a very similar approach: it convinced the Quad to establish a new agreement with all the desired changes (the WTO Agreement) which included a legally distinct but largely identical version of the old agreement (GATT 1994) (I provide a detailed account of this strategy in my paper on the club approach to trade lawmaking, pp. 165-181). By negotiating a DSU 2.0 to overcome the AB impasse, WTO Members would thus be taking a page out of the US’s book.

This is not do deny that the challenges in negotiating a DSU 2.0 will be formidable. Assembling enough WTO Members to bring the DSU 2.0 into force will not be easy (even though it strikes me as more realistic than achieving an amendment of the original DSU by consensus). Moreover, WTO Members would have to overcome their long-standing reluctance to contemplate a vote if some WTO Members decide to act as spoilers. While there is no guarantee of success, negotiating a DSU 2.0 would allow WTO Members who are determined to preserve binding dispute settlement to stop wondering whether the US blockage of the AB is a means to an end or an end in itself. Instead, they would be able to move ahead – with the US if possible, without the US if necessary.

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Three Scenarios for the Future of the WTO Appellate Body, or: Why WTO Members Should Start Negotiating a DSU 2.0

A fundamental uncertainty bedevils attempts to unblock the appointment process of WTO Appellate Members: is the US holding up Appellate Body appointments in order to generate enough leverage for a negotiated reform of WTO dispute settlement? Or does the US seek to abolish the Appellate Body (in effect if not in law) in order to return to a GATT-style dispute settlement system where WTO Members can effectively veto panel reports – a result that it will achieve by default without any need for negotiations? This uncertainty matters: As long as WTO Members hold out hope that the US will start to engage at some point, they have an excuse not to start negotiating reforms to the DSU among themselves; after all, they’re waiting for the US to make a move. In my view, this is a risky strategy. It might play out in one of two ways:

Scenario 1: WTO Members get lucky and everything works out (unlikely)

Given Lighthizer’s nostalgia for the GATT’s dispute settlement system, it strikes me as unlikely that he will engage in negotiations to preserve binding dispute settlement in the WTO. However, Trump might lose the 2020 presidential election, and his Democratic successor might install a USTR who has more appreciation for the value of the WTO dispute settlement system. While a new USTR would probably not simply unblock the AB appointment process, given the bipartisan concerns about the operation of the AB in the US, she or he might be willing to use the US’ leverage to negotiate reforms that will lead to an improved system. In the best-case scenario, a reformed AB could take over relatively seamlessly: as Geraldo Vidigal has recently noted, the current AB will likely be issuing reports until way into 2021. However, this outcome faces long odds: from the outcome of the 2020 election to the new USTR to WTO Members reaching consensus on amendments to the DSU, everything would have to fall into place.

Scenario 2: WTO Members wait, and wait, and the AB goes away (likely)

A second possibility is that, the longer WTO Members wait – and if Trump gets re-elected or his successor installs a USTR who maintains the blockage, they could find themselves waiting for a very long time – the more they will resign themselves to losing the AB and with it the binding nature of WTO dispute settlement (at least in its current form, as binding WTO dispute settlement could exist with a panel process alone and no appeal). WTO Members might adopt ad-hoc fixes, such as no-appeal agreements, to mitigate the impact. And, as Rob McDougall has pointed out, losing binding dispute settlement “will not bring about the collapse of the rules-based trading system”. However, this scenario has considerable downsides: it would create legal uncertainty, as the system would no longer have a mechanism to create consistency between conflicting panel reports, and WTO Members will likely resort to unilateral retaliation if there is no prospect of obtaining authorization to retaliate from the DSB (incidentally, this prospect might incentivize losing parties not to block the adoption of panel reports: they may well prefer that the complainant is subject to the strictures of the DSU Art. 21 and 22 procedures in implementing retaliation than that it does so unilaterally.)

Alternatives to waiting

What options do WTO Members have if they do not want to take their chances and put the survival of binding WTO dispute settlement into the hands of the US? Voting to launch the appointment process is not an option, since all decisions under the DSU have to be taken by consensus (DSU Art. 2.4). Amending the DSU without US cooperation is not an option either, since that must be done by consensus as well (WTO Agreement Art. X.8). Establishing a temporary appeal substitute under Art. 25 is possible, but may not be worth the effort, as Rob McDougall has convincingly argued. The only viable option, in my view, is for WTO Members to negotiate a DSU 2.0 and add it to Annex 2 of the WTO Agreement by amendment.

Scenario 3: WTO Members Negotiate a DSU 2.0

What would a DSU 2.0 look like?

A DSU 2.0 could incorporate the bulk of the provisions of the current DSU by reference, but should also include fixes to Art. 17 that would address those US concerns that are shared by other Members, while removing the ability of a single WTO Member to block Appellate Body appointments. The DSU 2.0 would provide that disputes between WTO Members who have accepted the DSU 2.0 will be resolved pursuant to the new agreement. Disputes involving a WTO Member who has not accepted the DSU 2.0 would continue to be resolved (to the extent possible) under the old DSU.

There are two major reasons for negotiating a DSU 2.0:

Starting negotiations on a DSU 2.0 would change the negotiating dynamic

Adding a DSU 2.0 to the WTO Agreement will require an amendment. However, since it would be an amendment to the WTO Agreement (rather than an amendment to the DSU), it could be adopted by a two-thirds majority. This would fundamentally change the negotiating dynamic. To begin with, WTO Members would no longer have the pretext of having to wait for the US to start negotiations. And since the US (or any other WTO Member for that matter) could no longer rely on their ability to block the outcome (as they could if the negotiators were trying to amend to the original DSU), this would create a strong incentive to engage. The US might not even be opposed to the negotiation of a DSU 2.0: either the result is to its liking, in which case it (under a new Administration) might sign up, or it would be able to free-ride on the signatories being subject to binding dispute settlement in their disputes among each other.

A DSU 2.0 could pave the way to pluralism in WTO dispute settlement

Even if the US does not join the DSU 2.0 and the DSU 2.0 thus ends up becoming a parallel dispute settlement system, this would be better than the alternative of losing binding dispute settlement entirely, since those WTO Members who still want to have binding dispute settlement could continue to use it. Having two parallel dispute settlement systems in the WTO would simply be a recognition of the fact that there are genuine philosophical differences among WTO Members about the appropriate role of adjudicatory bodies in international trade law (Rob McDougall’s CIGI paper does a fantastic job at teasing out these differences). Instead of attempting to shoehorn these different conceptions of the judicial role into one system, a DSU 2.0 would signal an embrace of pluralism in WTO dispute settlement.

Is a DSU 2.0 realistic?

Implementing changes to the WTO dispute settlement system via a new (but largely identical) DSU rather than amendments to the old DSU may sound far-fetched, but it is actually a tried-and-tested method for implementing new rules in the absence of consensus. In the late 1980s, when the US was thinking about how to make the GATS and TRIPS part of the GATT, it used a very similar approach: it convinced the Quad to establish a new agreement with all the desired changes (the WTO Agreement) which included a legally distinct but largely identical version of the old agreement (GATT 1994) (I provide a detailed account of this strategy in my paper on the club approach to trade lawmaking, pp. 165-181). By negotiating a DSU 2.0 to overcome the AB impasse, WTO Members would thus be taking a page out of the US’s book.

This is not do deny that the challenges in negotiating a DSU 2.0 will be formidable. Assembling enough WTO Members to bring the DSU 2.0 into force will not be easy (even though it strikes me as more realistic than achieving an amendment of the original DSU by consensus). Moreover, WTO Members would have to overcome their long-standing reluctance to contemplate a vote if some WTO Members decide to act as spoilers. While there is no guarantee of success, negotiating a DSU 2.0 would allow WTO Members who are determined to preserve binding dispute settlement to stop wondering whether the US blockage of the AB is a means to an end or an end in itself. Instead, they would be able to move ahead – with the US if possible, without the US if necessary.